September 27, 2010
Not Yet Out of the Woods
John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy
"CAMBRIDGE September 20, 2010 - The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion."
..."Note that the plunge in the smoothed growth rates occurred because even though GDP growth was positive for the second quarter, there was a sharp downturn in the monthly figures, which a variety of indicators also picked up (such as the ECRI Weekly Leading Index), and has unfortunately continued into the present quarter."
..."The Committee typically dates the beginning of a recovery at the point where the growth rates of underlying measures of economic growth clearly spike from negative to positive. What is of immediate concern though, is the trajectory that growth rates have taken since then."
...click post title for the rest of the story...
Market Climate
Presently, our valuations measures suggest clear overvaluation (our estimated 10-year total return for the S&P 500, based on a variety of models including the operating earnings model presented a few weeks ago, is only about 5%-5.4% annually), market action is strenuously overbought, market internals are relatively positive, but economic pressures are still negative, and sentiment is once again bullish enough to define an "overvalued, overbought, overbullish" condition.
The Strategic Growth Fund is fully hedged at present, and currently has a "staggered strike" position, where our put option strikes are raised closer to the level of the market (at a cost of just over 1% of assets) to provide tighter downside defense. On Friday's advance, our stocks did not participate as much as we would have liked (coming off of a very good relative performance on Thursday), so the Fund pulled back a fraction of a percent. As usual, the day-to-day fluctuations in the Fund when we are hedged are primarily driven by the difference in performance between the stocks we hold long and the indices we use to hedge. The Strategic International Fund is also over 90% hedged, with the precise figure varying modestly from day-to-day as we execute new stock purchases and associated hedges. Suffice it to say that both Funds are defensive here.
As a sidenote in reponse to a few questions last week, since our precise hedge level may vary from day-to-day and week-to-week, I may describe our hedge position with words such as "fully," "largely," "tightly," "nearly fully" and so forth, which really convey little distinction. At the point where it becomes appropriate to remove large portions of our hedges, I will be very clear about our change in position and the rationale for that change. I don't anticipate such major hedging changes until we observe a clear shift in some combination of valuation, overbought conditions, or economic pressures.
In bonds, the Market Climate continues to be characterized by moderately unfavorable yield levels and favorable (i.e. downward) yield pressures. The Federal Reserve continues to telegraph a willingness to engage in further quantitative easing, which suggests the prospect of further Treasury purchases in the event of economic weakness. We're observing clear pressure on the U.S. dollar in response to suggestions about QE, which is as expected. The Strategic Total Return Fund currently has a duration of just over 4 years, primarily in straight Treasury notes, about 10% of assets in precious metals shares, about 5% of assets in foreign currencies (primarily Japanese yen, Swiss franc, and British pound), and about 2% of assets in utility shares.
